Chapter 5 -Production Planning and ControlCASELET:ESCOM-COPING WITH RUNWAY CAPACITY NEEDSESCOM is a producer of electronic home appliances, including VHS (Video HomeSystem) television recorders, located in northern California. The packaged productweighs about 75 kg. ESCOM was not the innovator of the system. Rather, its managerssat back and let RCA and others develop the market, and ESCOM is currently producingunder license agreements. ESCOM has a conscious strategy of being a follower with newproduct innovations. It does not have the financial resources to be a leader in researchand development. ESCOM's present opportunity is indicated by the fact that industrysales of VHS recorders have increased 30 per cent per year for the past two years, andforecasts for the next year and the two following are even more enticing. ESCOM hasestablished a 10 per cent market share position and feels that it can at least maintainthis position if it has the needed capacity; it could possibly improve its market share ifcompetitors fail to provide capacity at the time it is needed. Year 0 1 2 3 4 5 Forecast,1000 Units 100 140 195 270 350 450 Capacity (gap), or slack 5 (35) (90) (165) (245)(345) 1000 units. The forecasts and capacity gaps are indicated in Table. ESCOMregards the first year forecast as being quite solid, based on its present market shareand a compilation of several industry forecasts from different sources. It is less sureabout the forecasts for future years, but it is basing these forecasts on patterns for bothblack and white and color TV sales during their product life cycles. ESCOM's VHS modelhas a factory price of Rs 600. Variable costs are 70 percent of the price. Inventorycarrying costs are 20 per cent of inventory value, 15 percentage points of whichrepresents the cost of capital. ESCOM's facility planners estimate that a 40,000 unitplant can be built for Rs. 5 million and a 200,00 unit plant, for Rs. 10 million. Land andlabour are available in the area, and either size plant can be built within a year.(a) What capacity plans do you think ESCOM should make for next year? Why?(6) What longer-tem capacity plans shoald ESCOM make? Wby?a What are the implications of these plans for marketing. distribution, andproduction?[Source: Modern Production/Operations Management by Elwood S.Buffa & Rakesh K.Sarin]

Capacity planning refers to when a company defines its short-term and long-term capacity needs and…

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(a) What capacity plans do you think ESCOM should make for next year? Why? (6) What longer-term capacity plans should ESCOM make? Why? dWhat are the implications of these plans for marketing, distribution, and production?